Metaverse visualization

Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation.

Executive summary: Imagine an immersive digital world, a space to interact with friends, make purchases, learn, be entertained, and more. This is some of the potential offered by the metaverse. It’s seen by many as the next iteration of the internet. In the metaverse, real world experiences can be (re)created without physical or geographic constraints. Gaming platforms such as Fortnite, Minecraft and Roblox offer a sign of things to come. Each offers a virtual world, full of in-game purchase opportunities and the scope to participate in mass events. The global market for interactive gaming experiences and adjacent opportunities is already bigger than the revenues grossed by movies worldwide. Looking forward, the size of the metaverse is set only to grow. Although still early days, software businesses with platform offerings should win-out over their hardware counterparts.

After the internet, what comes next? It’s a fair question to ponder. For sure, barriers between our online and offline lives are fast disappearing, a trend undoubtedly exacerbated by the recent pandemic. Online digital environments are already being used increasingly for shared human experiences. Now, most of us are living ever-more dispersed digital lives, moving between different (and sometimes virtual) worlds seamlessly. The future will likely see an even more profound shift in the way people work, play, learn or simply hang out. Welcome to the metaverse.

Think of the metaverse as a digital mirror of the physical world

Go onto Google, type in the term ‘metaverse’ and you will be confronted with multiple definitions. The word, however, was first deployed in a science fiction novel written in 1992 called Snow Crash, by Neal Stephenson (who now works for virtual reality company, Magic Leap), which your Fund Manager read earlier this year. Stephenson perhaps describes the metaverse most amusingly here as being “like Las Vegas, freed from [the] constraints of physics and finance.” Although this may sound like a daunting vision to some readers, the point Stephenson is trying to make is that the metaverse can be thought of as a digital mirror of the physical world. Put another way, it is a collective virtual shared space. Other terms that try to capture the essence of the metaverse might include the AR [augmented reality] cloud or the spatial internet.

Begin with these conceptions and you can already see the possibilities embedded in the notion of the metaverse. Such an environment could allow for the re-creation and amplification of real-world experiences in a digital format, without physical or geographical constraints. Think of it like this: just as every company created a webpage within the last two decades and then, at some later point, launched a Facebook page, so in the future, companies will look to establish a real-time metaverse presence. Perhaps the best definition of innovation is creating a new market where one previously did not exist. When it comes to the metaverse it may make sense to think even bigger – an entire new economy being created.

Handshake on multimedia background

All companies will look to establish a real-time metaverse presence

How might all this work practically? Simulation games in which people can spend their time are not novel. Readers who remember the pre-broadband era may recall the launch of The Sims in 2000 or Second Life in 2003 as early iterations. Wind the clock forward and with faster compute speeds, enhanced data storage capacity and vastly improved digital rendering, new platforms such as Fortnite, Minecraft and Roblox have emerged. While your Fund Manager was reading Snow Crash, his children were comfortably spending time in these metaverses.

Gaming is set to emerge as the next dominant technology platform, much in the same way that search engines, mobile phones and social networks helped redefine almost all other industries in the past. The market is a huge one: there were 2.69bn active gamers worldwide in 2020 (or 35% of the world’s population), By the middle of this decade, the figure could be ~20% higher, per estimates from Statista. Many already see video games as a ‘third space’, somewhere that is different both to their home and work environments. Indeed, the average time spent playing video games is estimated at 1.1 hours per day, per person, according to Ofcom (the organisation also says that 62% of Brits are regular gamers).

As video games have evolved (i.e. got better, so that people spend more time engaging with them), so have their business models. Put simply, they have become more commercial. The logic is simple: greater engagement generates higher recurring revenues, which are then invested into further innovation to drive even more time spent online. It’s a win-win situation for all. The best evidence to support this contention is that in-game purchases as a percentage of total gaming revenues have increased from ~20% to ~75% over the past decade (per Statista). With users migrating to virtual worlds, brands are quickly following. In-app purchases are just one example. Consider another, where companies might purchase space in virtual worlds to advertise their wares. Digital clothing (for online avatars), world-building and/or marketing can and will have a real impact on brand development. Then there is the metaverse mall – rather than shopping through a specific retailer’s website, why not meet a friend in a virtual world and check out a series of digital storefronts together? The same principles can be applied to education as well as entertainment. All three might become more shared, immersive experiences.

Gaming may be the next dominant technology platform

Person playing on touchpad

There is ample evidence to show the power of the metaverse in action currently. Take Pokémon Go as an early compelling example of how it can impact consumer behaviour. The mobile app drove millions of people outdoors to find, battle and capture virtual creatures at physical locations. Real-world businesses benefited, with restaurants that were virtual stops inside the game generating increased foot traffic, better online reviews and at least a 4% average boost to sales (per a study by McGill University and the Indian School of Business).

Pokémon, however, is a fairly rudimentary example, a blend of augmented reality with basic cartoon-like overlays. Better then to consider the worlds of Fortnite, Roblox and Minecraft. Daily active users on the former two platforms are 25m and 43m, while Minecraft counts 112m gamers that access its service. The commonality across all three worlds is the existence of virtual currencies (V-Bucks, Robux and Minecraft Coins, respectively), allowing for users to make in-game/in-app purchases. Fortnite’s marketplace, for example, features a rotating set of skins (i.e. clothes), dance moves and cosmetic items. Participants can choose to dress their avatars in clothes from the likes of Burberry or Prada should they wish. The constant rotation of available options encourages repeat purchase behaviour (20% of Roblox users change their avatar daily). At the same time, part of the current in-game culture seems to award status and recognition to those with the most recent, coveted and high-cost purchases. The average paying Fortnite user spends ~$20/month on in-game transactions. Microsoft estimates that ~17% of its Minecraft users make monthly purchases, at an average of ~$12/month.

Metaverse platforms are about far more than just gaming, however. Their future is premised on the flywheel effect engendered by increased engagement. Repeat purchases are just one iteration. Others include the ability for gamers to become developers (and get paid for doing so), creating entire online micro sub-communities. Elsewhere, both Fortnite and Roblox have experimented with virtual concerts. The latter achieved a marked recent success by hosting an event with rapper Lil Nas X, which was viewed 37m times. Roblox has since signed music deals with both Sony and BMG.

Increased engagement drives a virtuous circle effect

Global virtual multi-player gaming, virtual simulation platforms and interactive media revenue already reached $110bn in 2019. For context, this figure is larger than the revenues grossed by the global film industry, which recorded $97bn of sales in 2018 (figures from SuperData and the Motion Picture Association respectively). Over 80% of the $110bn total came from in-game purchases on virtual goods with the remainder split between related activities such as retail, digital sales, downloadable content and advertising. Looking ahead, the opportunity is significant. The overall global gaming market is growing at a ~9% compound annual rate and could be worth almost $300bn by 2027 (per Research and Markets). Viewed from a different perspective, Roblox says that its potential addressable market is any person under the age of 24. Consensus estimates assume its daily active user base will at least double by 2024.

Before we all get too excited, it is worth remembering that the metaverse is still an emerging concept without even perhaps a fully agreed upon definition. Common standards, interfaces and communications protocols between and among (different) virtual environments are still in development. Consider that the internet, as we know it, was not developed by any single entity, but built collaboratively around open standards and protocols. Whether such principles might govern any successor platform is not clear. Were any company to consolidate its power over a future metaverse world, then the control it could exercise in terms of the sharing of information as well as commercial and security practices could be disproportionate. There are also valid concerns that the more control platforms potentially hand to their users to create and shape their environments and to interact with others, the greater may be the risk of more questionable content emerging. The subsequent impact on adjacent brands could also be problematic. Also do not forget that an increasing amount of time spent in immersive, virtual worlds may have negative social implications, in terms of how we interact practically in physical environments. This charge was, however, levelled at both television and the internet in their early days, although with little justification.

Hand holding money pouch on multimedia background

The key challenge remains how to monetise the metaverse

With no limit to the potential range of experiences possible in the metaverse, the challenge is how to monetise them and, for investors, how this translates into value creation. History would suggest that businesses on the software side of the value chain will likely prevail over the manufacturers of hardware. Beyond differentiated IP, the challenge is to create content (or experiences) that will generate recurring revenues and increase the opportunity cost of switching for users. Increasing the in-metaverse monetisation of experience seems the most likely route to success for now.

Of the three currently leading metaverse platforms referenced earlier, Roblox is the only one listed, at ~$45bn (Fortnite is privately owned, and Microsoft owns Minecraft). Beyond Roblox, Unity Software offers potentially interesting exposure to the theme via its foundational software solutions. These help support ~50% of the world’s currently most popular games. Unity is US-listed and capitalised at ~$35bn. Both Roblox and Unity are loss-making. Other, larger businesses that will potentially seek to play a role in the evolution of the metaverse will likely include Apple, Facebook, Microsoft, Netflix and NVIDIA. Ultimately, it’s a competition for gaining more share of consumers’ leisure time. See you in the metaverse, maybe sometime very soon!

Alex Gunz, Fund Manager, Heptagon Capital

Past performance is no guide to future performance and the value of investments and income from them can fall as well as rise.


The document is provided for information purposes only and does not constitute investment advice or any recommendation to buy, or sell or otherwise transact in any investments. The document is not intended to be construed as investment research. The contents of this document are based upon sources of information which Heptagon Capital LLP believes to be reliable. However, except to the extent required by applicable law or regulations, no guarantee, warranty or representation (express or implied) is given as to the accuracy or completeness of this document or its contents and, Heptagon Capital LLP, its affiliate companies and its members, officers, employees, agents and advisors do not accept any liability or responsibility in respect of the information or any views expressed herein. Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation. Where this document provides forward-looking statements which are based on relevant reports, current opinions, expectations and projections, actual results could differ materially from those anticipated in such statements. All opinions and estimates included in the document are subject to change without notice and Heptagon Capital LLP is under no obligation to update or revise information contained in the document. Furthermore, Heptagon Capital LLP disclaims any liability for any loss, damage, costs or expenses (including direct, indirect, special and consequential) howsoever arising which any person may suffer or incur as a result of viewing or utilising any information included in this document. 

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